Wall Street plunged again in a crisis of confidence today as anxieties about the financial system still ran high after the government's...
NEW YORK — Wall Street plunged again in a crisis of confidence today as anxieties about the financial system still ran high after the government’s bailout of insurer American International Group (AIG). Investors seeking the safety of hard assets and government debt sent gold, oil and short-term Treasurys soaring.
The Dow Jones industrial average dropped 449.36, or 4.1 percent, to close at 10,609.66. After a nose-dive Monday, the index is down more than 7 percent on the week, and has fallen more than 25 percent since reaching a record close of 14,164.53 on Oct. 9 last year.
Broader stock indicators also plunged. The Standard & Poor’s 500 index dropped 57.20, or 4.7 percent, to 1,156.39, while the Nasdaq composite index slid 109.05, or 4.9 percent, to 2,098.85.
Microsoft, one of the 30 Dow stocks, fell $1.42 to close at $24.57 a share. Boeing, also a Dow stock, slid $4.72 to $57, a more than three-year low.
Most Read Business Stories
- The penthouse atop Smith Tower is on the rental market for the first time
- Downtowns will be back, but Seattle has choices to make
- Boutique cruise line Windstar will move its Seattle headquarters to Miami
- Zillow’s price estimates are now cash offers in homebuying push
- FCC approves $50 monthly high-speed internet subsidy for low-income households
The Federal Reserve is giving a two-year, $85 billion loan to AIG in exchange for a nearly 80 percent stake in the company after it lost billions in the risky business of insuring against bond defaults. Wall Street had feared that the conglomerate, which has its tentacles in various financial services industries around the world, would follow the investment bank Lehman Brothers Holdings into bankruptcy. The ramifications of the world’s largest insurer going under likely would have far surpassed the demise of Lehman.
“People are scared to death,” said Bill Stone, chief investment strategist for PNC Wealth Management. “Who would have imagined that AIG would have gotten into this position?”
He said the fear gripping the market reflects investors’ concerns that AIG wasn’t able to find a lifeline in the private sector and that Wall Street is now fretting about what other institutions could falter.
The two independent Wall Street investment banks left standing — Goldman Sachs and Morgan Stanley — remain under scrutiny, as does Seattle-based Washington Mutual, the country’s largest thrift bank. Morgan Stanley revealed its quarterly earnings late Tuesday, posting a better-than-expected 7 percent slide in fiscal third-quarter profit. It insisted that it is surviving the credit crisis that has ravaged many of its peers.
Goldman Sachs fell $23.01, or 17.3 percent, to close at $110 share and Morgan Stanley fell $7.56, or 26.3 percent, to $21.18.
Washington Mutual fell 31 cents, or 13.4 percent, to $2.01.
Lehman filed for bankruptcy protection on Monday, and by late Tuesday had sold its North American investment banking and trading operations to Barclays, Britain’s third-largest bank, for the bargain price of $250 million. Over the weekend, Merrill Lynch, the world’s largest brokerage, sold itself in a last-ditch effort to avoid failure to Bank of America.
The stock market is likely to see heavy back-and-forth movement as traders continue to assess the flood of news that has poured in over the past several days.
On Monday, the Dow lost 504 points, the largest tumble since its drop following the September 2001 terror attacks. On Tuesday, it rose 141 points, after the Fed decided to leave interest rates unchanged.
“It’s still uncertain ground we’re treading. We just have to move on a daily basis,” said Jack Ablin, chief investment officer at Harris Private Bank.
The government took other measures Tuesday to help alleviate the turmoil in the markets. The Treasury said it will start selling bonds for the Fed to aid it with its lending efforts, while the Securities and Exchange Commission said it will strictly prohibit naked short-selling starting Thursday.
Short-selling is when traders borrow shares of a stock they expect to fall and sell them — if the stock does indeed fall, the traders buy the cheaper shares to cover the borrowed ones and profit from the difference. Naked short-selling occurs when sellers don’t actually borrow the shares before selling them; it’s a practice some say is partially responsible for the huge drop in the shares of investment banks like Lehman, Merrill Lynch and Bear Stearns, which JPMorgan Chase & Co. bought earlier this year.
Bond prices wavered today. The yield on the benchmark 10-year Treasury note, which moves opposite its price, slipped to 3.41 percent from 3.43 percent late Tuesday. The dollar was lower against other major currencies.
Gold prices surged as nervous traders sought safety. Gold jumped $86.30, or 11 percent, to $866.80 an ounce on the New York Mercantile Exchange.
Crude oil rebounded rose $6.01, or 6.59 percent, to settle at $97.16 a barrel on the Nymex after the government reported a drop in domestic crude and gas inventories. Oil dropped by about $10 a barrel on Monday and Tuesday amid concerns that economic weakness will hurt demand.
“People are afraid of the unknown, and they don’t know what’s on the books of these companies,” said Joe Saluzzi, co-head of equity trading at Themis Trading. “The first reaction in a situation like this is to sell.”
Saluzzi noted that surging gold prices and other measures of investors’ jitters indicate that anxiety is building.
“There is a lot more fear today than there was on Monday and Tuesday,” he said.
Indeed, the Chicago Board Options Exchange’s volatility index, known as the VIX, and often referred to as the “fear index,” jumped 12 percent today.
Saluzzi is somewhat optimistic that the nervousness could be nearing a crescendo, which could squeeze out more investors and then clear the way for a snapback rally.
But the woes of the financial sector could also exacerbate problems facing other parts of the economy, given that individuals and businesses rely on the nation’s money centers.
The Commerce Department reported today that home construction fell by 6.2 percent in August to 895,000 units, the slowest pace since January 1991. Slumping demand for houses, sinking home prices and mortgage defaults have been the catalysts behind Wall Street’s turmoil — and the risky mortgage-backed assets held by the nation’s banks are not apt to regain in value until the housing market turns around.
Overseas, Japan’s Nikkei stock average rose 1.2 percent after AIG’s rescue, but Hong Kong’s Hang Seng index lost 3.6 percent. Britain’s FTSE 100 fell 2.25 percent, Germany’s DAX index fell 1.75 percent, and France’s CAC-40 fell 2.14 percent.